When is a good time to examine your household budget? Now! Even if you already have one, it is always beneficial to re-examine it frequently. As static as life may feel at times, some expenses are changing.
A change in season can mean a change in your expenses, whether it’s new clothes for the kids or another sport you need to outfit for. So what’s the key to making your budget work? Simply put, ensuring your monthly living expenses and any debt that you are carrying do not cost more than the income you and/or your spouse are bringing home.
Understanding your debt service ratio, a measurement used by the bank to determine if your bills represent an acceptable proportion of your income, will assist you with your household budget. There are two primary debt service ratios: gross debt service ratio (GDS) and total debt service ratio (TDS).
Your gross debt service ratio represents your monthly house payment divided into your gross monthly income, expressed as a percentage. The maximum acceptable GDS is 30% but keep in mind this is the maximum so ideally it should be lower. A healthy budget should include a GDS that’s about 25%. If your GDS is more than 30% this is an indicator that your housing payments are too high.
Your total debt service ratio represents your monthly housing payment plus your monthly payments to all loans and credit cards, divided into your gross monthly income and expressed as a percentage. The maximum total TDS is 40% so try stay below this. If your TDS is above 40% then this is an indicator that either your housing payments or your payments of other debts owing are too high.
GDS and TDS are integral part of your budget as these two components can become too high leading you into a debt that may be too difficult to carry. A good budget not only involves reasonable housing and other debt payments but there should be some surplus income left over to contribute to savings. You just never know when life might throw you a curveball. A proper budget should factor in all of your expenses. Don’t forget to include the irregular expenses that may only occur once a year like an insurance payment, car maintenance, or professional dues. A key to positive money management is awareness and planning. There are three primary budget related factors that contribute to overspending in families living paycheque to paycheque. The first is unrealistic housing payments, the second is over spending and the third is too much debt.
Overspending is easy to do, particularly when you are charging your credit card for purchases and not seeing the immediate direct impact this has on your bank account. Avoid credit cards on unplanned purchases to avoid incurring more debt. Use cash as opposed to your debit card as an effective way to be more aware of what is being spent.
Set yourself a weekly cash allowance that will cover any expenses you have and this will also help you decrease the number of times you use your debit card. Entertainment, food (especially take out and dining), and shopping are the most common areas of wasteful spending. Ask yourself “do I need this?” and if the answer is no then move on. Another suggestion is to make a wish list and review it in 1-2 weeks to see if your desire was purely impulse or are you still coveting the item? This may help keep you in check.
Where debt is concerned you need to analyse how much you owe and how you are paying your creditors. If you are making minimum payments or are even struggling with trying to come up with minimum payments then this is a sign that you may be over-extended. As well, if you are dipping into your savings or RRSP’s to pay off debt then it is due time to review your situation. Improving your financial situation will positively affect your mental and physical being. If you are struggling at this alone then sitting down with a debt consultant is one way to review your debts and come up with a financial strategy on tackling your household budget and making it managable. Otherwise, set the course and stay on track. Your future possibilities can be abound with proper realistic planning.
Jillian Klein is a certified BIA Credit Counsellor. She runs DebtCare Canada’s rehabilitation program and helps clients plan to build a brighter financial future by assisting them in finding a financial balance and budget in their lives. At DebtCare Canada Jillian helps clients regain control of their finances and learn how to live debt free.